top of page

A guide to SaaS MRR & ARR


A guide to SaaS MRR & ARR

➡️ What is MRR & ARR?


MRR stands for Monthly Recurring Revenue


ARR stands for Annual recurring revenue


That means customers contractually agreed to use your product on a recurring basis


➡️ What’s so great about MRR & ARR?


💰 High margins - COGS are often times limited to hosting, and customer support. Higher margins = more money to invest in SG&A


💰 High predictability - when customers are charged on a recurring basis, your predictability goes up. Similarly, when customers are committed for a full year, it becomes very difficult to churn mid year


💰 Favorable cash position - ARR often times means cash is collected upfront…as with any organization, especially with a startup, cash is KING


💰 Simple accounting - With the right tools in place, reconciling deferred revenue is a breeze


It’s no surprise then that SaaS MRR and ARR Startups receive some of the highest valuations out there


➡️ How do you calculate MRR & ARR?


Well...the simple answer is to sum up the monthly contract amounts


but that will only get you ENDING MRR / ARR


It’s important to also understand the MOVEMENTS in MRR / ARR…


Here’s the most common formula to use

Opening MRR / ARR


➕ New MRR / ARR→ This is added MRR from new customers


➖ Churn MRR / ARR→ This is lost MRR from existing customers who have opted out entirely


➕ Expansion MRR / ARR→ This is added MRR from existing customers


➖ Contraction MRR / ARR → This is lost MRR from existing customers who are still active, but at a reduced rate




➡️ How can you forecast MRR / ARR?


Well, it’s actually pretty simple


If you know what % of your opening MRR / ARR each month is going to the above buckets (new, churn, expansion, contraction)…


You can then add similar projections to get to a reasonable estimate of MRR / ARR


Got anything else to add about SaaS MRR & ARR?


And that was the guide to SaaS MRR & ARR



72 views

Related Posts

See All

Comments


bottom of page